HUD "Disparate Impact" Rule and the Insurance Industry

The "disparate impact" doctrine is a tenet of employment law that prohibits a facially neutral employment practice which is deemed to have an unjustified or disproportionate adverse impact on members of a minority group or a class protected by Title VII of the Civil Rights Act. Recently, however, the disparate impact doctrine has been the basis of a new encroachment of federal authority into the realm of state-based insurance regulation.

The U.S. Supreme Court championed the disparate or adverse impact doctrine in the landmark employment rights case of Griggs v. Duke Power Co., 401 U.S. 424 (1971). In Griggs, the Supreme Court held that the "absence of discriminatory intent" was not enough to redeem employment procedures if those procedures nevertheless acted as impediments to employment that disproportionately affected minorities or protected classes. Thus, Griggs signaled that not only was intentional discrimination unlawful under the Civil Rights Act, but unintentional discrimination was prohibited as well. If a certain rule or procedure can be shown to have an adverse or disparate impact on a protected class, whether it was intended as discriminatory or not is irrelevant.

The HUD Rule imposes liability for discrimination regardless of intent.
In early 2013, the Department of Housing and Urban Development (HUD) enacted a final rule (the "Rule") implementing the discriminatory effects standard of the Fair Housing Act. As stated in the Rule, the Fair Housing Act prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin. HUD, statutorily charged with enforcing the Fair Housing Act, has interpreted it to prohibit practices with an unjustified discriminatory effect, regardless of whether there was an intent to discriminate.[1]

The Rule provides that liability may be established under the Fair Housing Act based on a practice's discriminatory effect, even if the practice was not motivated by a discriminatory intent. Further, the Rule includes a three-part burden-shifting test for determining when a practice with a discriminatory effect violates the Fair Housing Act.[2]

The Rule could expose virtually any factor used by insurers to assess risk or price coverage to challenge on the "disparate impact" basis.
The Rule specifically notes that HUD has long interpreted the Fair Housing Act to prohibit discriminatory practices in connection with homeowners insurance. This means that the "unintentional discrimination" prohibition could reach insurance practices, and insurance companies could face "disparate impact" challenges to virtually any factor used to assess risk or price insurance coverage if such factors have a disproportionate adverse affect on protected classes.

Insurance industry insiders objected to the Rule before it was even finalized, asserting that it was a violation of the McCarran-Ferguson Act's prohibition against federal law interference with state insurance regulation. HUD dismissed these assertions in the final Rule publication, stating that McCarran-Ferguson does not preclude it from issuing regulations that may apply to insurance policies.

The American Insurance Association and the National Association of Mutual Insurance Companies recently filed suit against HUD, asserting that the Rule is a violation of the McCarran-Ferguson Act and challenging the "unintentional discrimination" liability imposed by the Rule.

Additionally, the United States Supreme Court has agreed to hear another case involving a challenge to the Rule. The Supreme Court granted certiorari in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc., in June of 2013, putting the issue of disparate impact claims under the Fair Housing Act squarely before the Court.

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